Real Estate IRR: How to Calculate the True Return on Property

Why "rental yield" isn't enough

When a real estate agent quotes a "gross yield of 7%," they're simply dividing annual rent by the purchase price. This figure is misleading because it ignores:

• Acquisition costs (closing fees, agency) — 8 to 12% of the price
• Mortgage cost — interest payments mechanically reduce real returns
• Non-recoverable expenses — property tax, insurance, vacancy, renovations
• Capital gain or loss at resale
• Taxation on rental income and capital gains

IRR (Internal Rate of Return) solves all these problems by integrating every financial flow into the calculation.

How IRR works

IRR is the discount rate that makes the Net Present Value (NPV) of your investment equal to zero. In simple terms: it's the annualized return that makes the sum of all cash inflows, discounted to today's euros, exactly equal to the sum of all outflows.

Cash flows included:

1. Year 0: down payment + closing costs (negative flow)
2. Each year: rent received (or saved) − mortgage payments − expenses − taxes (net flow)
3. Final year: resale price − remaining loan balance − selling costs (positive flow)

IRR doesn't tell you "how much you earn" in absolute terms, but "what is the equivalent annualized return" — which allows direct comparison with stocks, bonds, or any other investment.

Primary residence vs rental investment IRR

For a primary residence, the "rent" is implicit: it's the rent you no longer have to pay. This is a very real positive cash flow — but invisible.

For a rental investment, rent is explicit but taxation is heavier (income tax, social charges, wealth tax). The rental IRR is therefore often lower than what gross figures suggest.

What IRR should you target?

Practical benchmarks:

• IRR < 4% — Real estate isn't competitive vs a simple savings account
• IRR 4-7% — Decent for a primary residence in a stable market
• IRR 7-10% — Good investment, comparable to long-term stock returns
• IRR > 10% — Excellent, but verify your assumptions aren't too optimistic

Classic IRR calculation mistakes

1. Forgetting closing costs — They often represent 2-3 years of net yield
2. Overestimating appreciation — Using national averages instead of local market data
3. Ignoring vacancy — One month vacant per year reduces yield by ~8%
4. Not counting major repairs — Roof, facade, regulatory upgrades
5. Forgetting inflation — A 5% IRR with 2% inflation gives ~3% real return

See also: Buy vs Rent in 2026: The Complete Guide · SCPI with Leverage: Why It Changes Everything